Markets figured it was a toss up whether the Federal Open Market Committee would cut the federal funds rate by a quarter percentage point or a half point when the meeting concludes Wednesday afternoon. Futures contracts were pricing 50-50 odds of a 50 basis-point vs. a 25 basis-point cut.

"We're just marking time" ahead of the Fed decision, said Mike Ryan, fixed income strategist at UBS. "We've been grinding higher all day."

Bonds had been lower earlier but turned mysteriously after the Conference Board reported that its consumer confidence index slipped marginally to 83.5 in June from 83.6 in May.

Traders had been expecting a larger decline. Stronger-than-expected growth would typically weigh on fixed-income investments. See full story.

"The report was milquetoast," Ryan said. Downward revisions to earlier and a "whisper" number that the index could rise to 84.0 or higher muted the market's reaction to what would normally be slightly negative news, he said.

U.S. stocks were higher in choppy trades. Major indexes gained about 0.2 percent after heavier losses of nearly 2 percent on Monday. The Nasdaq lost ground. See Market Snapshot.

Meanwhile, the dollar gained strength, adding about 0.1 percent against the yen. The euro lost another 0.3 percent to $1.1509, a five-week low. See currency report.

The Fed-sensitive two-year note was up 2/32 at 100 9/32 to yield 1.10 percent, well below the current fed funds target rate of 1.25 percent, a clear sign that the Fed is expected to cut rates soon. The five-year note
FVX, -1.07%
was yielding 2.15 percent, down six basis points from 2.21 percent.

Short-term securities
IRX, -0.71%
were bouncing around 0.80 percent, reflecting strong odds that the federal funds rate would go that low within the next couple months.

Ryan said traders were trying to get ready for the unexpected from Wednesday's Fed statement. "Greenspan is the master wordsmith," he said. The wording of the statement could drive market reaction as much as the actual level of the fed funds rate does.

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